Friday, 16 November 2007

Personal Accounts - the bad is good

There are a couple of interesting news reports about the Personal Accounts scheme floating around, both of which superficially look like 'bad' news, but on reflection reinforce the value of a national quasi-compulsory scheme.

First up is this report, where the chief exec of the Personal Accounts Delivery Authority (PADA), says that the scheme may involve annual management charges of up to 0.5%, rather than the 0.3% envisaged by the Pensions Commission.

"When the Pensions Commission came up with that figure they had not really factored in start-up costs. From work I have seen so far it is unlikely that we could start at [0.3%]."

He added: "Around 0.5pc could be an aspiration for somewhere to start from."

The first thing to note is that he is talking about the level of charges at the outset. I still think the likelihood is that charges will fall over time as economies of scale are achieved.

But the more important thing to remember is that 0.5% is still much much lower than the insurance industry has been able to deliver despite having years to service the low paid. Let's remember the insurers convinced the Government to increase the charge cap on stakeholder pensions from 1% to 1.5% because they could not do the business at 1%. This to me is more confirmation of why the Pensions Commission, and the Government, have been absolutely right to go for the One Big Scheme model with auto-enrolment. It's the only way to make it work in a cost-effective way.

The second story is this one. It's the usual 'Pensions industry moans abour regulation' type story, but again almost by accident it makes the case for Personal Accounts.

The consultant says that SMEs will decide they are better off providing staff with a pension via Personal Accounts than via their own contract-based arrangement. And the problem is?

If anything this will be a case of levelling up. Contract-based DC schemes typically have no governance structure comparable with a trustee board, so there is no oversight of investments or benefits on behalf of members. In addition the charges in small contracct-based DC schemes are going to be higher - for employer and employee.

So the employer loses the admin hassle and pays lower costs. And the the individual is enrolled into a scheme with proper independent oversight and lower annual management charges. It's a win-win surely?

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